What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Polenergia (WSE:PEP) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Polenergia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = zł247m ÷ (zł6.0b - zł1.1b) (Based on the trailing twelve months to March 2023).
Therefore, Polenergia has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.8%.
Check out our latest analysis for Polenergia
In the above chart we have measured Polenergia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Polenergia.
What Does the ROCE Trend For Polenergia Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 139% more capital is being employed now too. So we're very much inspired by what we're seeing at Polenergia thanks to its ability to profitably reinvest capital.
In Conclusion...
All in all, it's terrific to see that Polenergia is reaping the rewards from prior investments and is growing its capital base. And a remarkable 353% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 1 warning sign for Polenergia that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About WSE:PEP
Polenergia
Engages in the generation, distribution, trading, and sale of electricity in Poland and internationally.
Solid track record with excellent balance sheet.
